ESMA Renews CFD Restrictions

The European Securities and Markets Authority (ESMA) has agreed to renew the restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients.

The rule, which has been in effect since 1 August 2018, was due to expire on 1 February 2019 but has now been renewed for a further three-month period.

ESMA says it has “carefully considered” the need to extend the intervention measure currently in effect, adding, “ESMA considers that a significant investor protection concern related to the offer of CFDs to retail clients continues to exist.”

The rule limits leverage on the opening of a position by a retail client from between 30:1 to 2:1 according to the volatility of the underlying. The limit is 30:1 for major currency pairs; 20:1 for non-major currency pairs, gold and major indices; 10:1 for commodities other than gold and non-major equity indices; 5:1 for individual equities and other reference values; and 2:1 for cryptocurrencies.

It also has a margin close out rule on a per account basis, which is intended to standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;

Negative balance protection on a per account basis to provide an overall guaranteed limit on retail client losses is also part of the restrictions, as is a restriction on the incentives offered to trade CFDs.

Finally the restrictions state that a standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts, must be published. The standardised risk warning will continue to allow use of the additional abbreviated risk warning introduced in the previous renewal decision for cases where the standard terms of a third party marketing provider have a character limit which is lower than the number of characters comprising the full or the abbreviated risk warning, provided that the advertisement also links to a webpage of the provider on which the full risk warning is disclosed, ESMA says.